Differential diagnosis includes ruling out other causes such as drug-induced conditions, dementia, infections, metabolic disorders, and endocrine disorders. Other psychiatric disorders must then be ruled out. In delusional disorder, mood symptoms tend to be brief or absent, and unlike schizophrenia, delusions are non-bizarre and hallucinations are minimal or absent.

Interviews are important tools to obtain information about the patient's life situation and past history to help make a diagnosis. Clinicians generally review earlier medical records to gather a full history. Clinicians also try to interview the patient's immediate family, as this can be helpful in determining the presence of delusions. The mental status examination is used to assess the patient's current mental condition.

A psychological questionnaire used in the diagnosis of the delusional disorder is the Peters Delusion Inventory (PDI) which focuses on identifying and understanding delusional thinking. However, this questionnaire is more likely used in research than in clinical practice.

In terms of diagnosing a non-bizarre delusion as a delusion, ample support should be provided through fact checking. In case of non-bizarre delusions, Psych Central notes, "All of these situations could be true or possible, but the person suffering from this disorder knows them not to be (e.g., through fact-checking, third-person confirmation, etc.)."

Some critical psychiatrists criticize the practice of defining one and the same belief as normal in one culture and pathological in another culture for cultural essentialism. They argue that since cultural influences are mixed, including not only parents and teachers but also peers, friends, books and the internet, and the same cultural influence can have different effects depending on earlier cultural influences, the assumption that culture can be boiled down to a few traceable, distinguishable and statistically quantifiable factors and that everything that does not fall in those factors must be biological, is not a justified assumption. Other critical psychiatrists argue that just because a person's belief is unshaken by one influence does not prove that it would remain unshaken by another. For example, a person whose beliefs are not changed by verbal correction from a psychiatrist, which is how delusion is usually diagnosed, may still change his or her mind when observing empirical evidence, only that psychiatry rarely if ever present patients with such situations.

The modern definition and Jaspers' original criteria have been criticised, as counter-examples can be shown for every defining feature.

Studies on psychiatric patients show that delusions vary in intensity and conviction over time, which suggests that certainty and incorrigibility are not necessary components of a delusional belief.

Delusions do not necessarily have to be false or 'incorrect inferences about external reality'. Some religious or spiritual beliefs by their nature may not be falsifiable, and hence cannot be described as false or incorrect, no matter whether the person holding these beliefs was diagnosed as delusional or not.

In other situations the delusion may turn out to be true belief. For example, in delusional jealousy, where a person believes that their partner is being unfaithful (and may even follow them into the bathroom believing them to be seeing their lover even during the briefest of partings), it may actually be true that the partner is having sexual relations with another person. In this case, the delusion does not cease to be a delusion because the content later turns out to be verified as true or the partner actually chose to engage in the behavior of which they were being accused.

In other cases, the delusion may be assumed to be false by a doctor or psychiatrist assessing the belief, because it "seems" to be unlikely, bizarre or held with excessive conviction. Psychiatrists rarely have the time or resources to check the validity of a person’s claims leading to some true beliefs to be erroneously classified as delusional. This is known as the Martha Mitchell effect, after the wife of the attorney general who alleged that illegal activity was taking place in the White House. At the time, her claims were thought to be signs of mental illness, and only after the Watergate scandal broke was she proved right (and hence sane).

Similar factors have led to criticisms of Jaspers' definition of true delusions as being ultimately 'un-understandable'. Critics (such as R. D. Laing) have argued that this leads to the diagnosis of delusions being based on the subjective understanding of a particular psychiatrist, who may not have access to all the information that might make a belief otherwise interpretable. R. D. Laing's hypothesis has been applied to some forms of projective therapy to "fix" a delusional system so that it cannot be altered by the patient. Psychiatric researchers at Yale University, Ohio State University and the Community Mental Health Center of Middle Georgia have used novels and motion picture films as the focus. Texts, plots and cinematography are discussed and the delusions approached tangentially. This use of fiction to decrease the malleability of a delusion was employed in a joint project by science-fiction author Philip Jose Farmer and Yale psychiatrist A. James Giannini. They wrote the novel "Red Orc's Rage", which, recursively, deals with delusional adolescents who are treated with a form of projective therapy. In this novel's fictional setting other novels written by Farmer are discussed and the characters are symbolically integrated into the delusions of fictional patients. This particular novel was then applied to real-life clinical settings.

Another difficulty with the diagnosis of delusions is that almost all of these features can be found in "normal" beliefs. Many religious beliefs hold exactly the same features, yet are not universally considered delusional. These factors have led the psychiatrist Anthony David to note that "there is no acceptable (rather than accepted) definition of a delusion." In practice, psychiatrists tend to diagnose a belief as delusional if it is either patently bizarre, causing significant distress, or excessively pre-occupying the patient, especially if the person is subsequently unswayed in belief by counter-evidence or reasonable arguments.

It is important to distinguish true delusions from other symptoms such as anxiety, fear, or paranoia. To diagnose delusions a mental state examination may be used. This test includes appearance, mood, affect, behavior, rate and continuity of speech, evidence of hallucinations or abnormal beliefs, thought content, orientation to time, place and person, attention and concentration, insight and judgment, as well as short-term memory.

Johnson-Laird suggests that delusions may be viewed as the natural consequence of failure to distinguish conceptual relevance. That is, the person takes irrelevant information and puts it in the form of disconnected experiences, then it is taken to be relevant in a manner that suggests false causal connections. Furthermore, the person takes the relevant information, in the form of counterexamples, and ignores it.

Psychosis is first and foremost a diagnosis of exclusion. So a new-onset episode of psychosis "cannot" be considered a symptom of a psychiatric disorder until other relevant and known causes of psychosis are properly excluded, or ruled out. Many clinicians improperly perform, or entirely miss this step, introducing avoidable diagnostic error and misdiagnosis.

An initial assessment includes a comprehensive history and physical examination by a physician, psychiatrist, psychiatric nurse practitioner or psychiatric physician assistant. Biological tests should be performed to exclude psychosis associated with or caused by substance use, medication, toxins, surgical complications, or other medical illnesses.

Delirium should be ruled out, which can be distinguished by visual hallucinations, acute onset and fluctuating level of consciousness, indicating other underlying factors, including medical illnesses. Excluding medical illnesses associated with psychosis is performed by using blood tests to measure:

- Thyroid-stimulating hormone to exclude hypo- or hyperthyroidism,

- Basic electrolytes and serum calcium to rule out a metabolic disturbance,

- Full blood count including ESR to rule out a systemic infection or chronic disease, and

- Serology to exclude syphilis or HIV infection.

Other investigations include:

- EEG to exclude epilepsy, and an

- MRI or CT scan of the head to exclude brain lesions.

Because psychosis may be precipitated or exacerbated by common classes of medications, medication-induced psychosis should be ruled out, particularly for first-episode psychosis. Both substance- and medication-induced psychosis can be excluded to a high level of certainty, using a

- Urinalysis and a

- Full serum toxicology screening.

Because some dietary supplements may also induce psychosis or mania, but cannot be ruled out with laboratory tests, a psychotic individual's family, partner, or friends should be asked whether the patient is currently taking any dietary supplements.

Common mistakes made when diagnosing people who are psychotic include:

- Not properly excluding delirium,

- Not appreciating medical abnormalities (e.g., vital signs),

- Not obtaining a medical history and family history,

- Indiscriminate screening without an organizing framework,

- Missing a toxic psychosis by not screening for substances "and" medications

- Not asking family or others about dietary supplements,

- Premature diagnostic closure, and

- Not revisiting or questioning the initial diagnostic impression of primary psychiatric disorder.

Only after relevant and known causes of psychosis are excluded, a mental health clinician may make a psychiatric differential diagnosis using a person's family history, incorporating information from the person with psychosis, and information from family, friends, or significant others.

Types of psychosis in psychiatric disorders may be established by formal rating scales. The Brief Psychiatric Rating Scale (BPRS) assesses the level of 18 symptom constructs of psychosis such as hostility, suspicion, hallucination, and grandiosity. It is based on the clinician's interview with the patient and observations of the patient's behavior over the previous 2–3 days. The patient's family can also answer questions on the behavior report. During the initial assessment and the follow-up, both positive and negative symptoms of psychosis can be assessed using the 30 item Positive and Negative Symptom Scale (PANSS).

A challenge in the treatment of delusional disorders is that most patients have limited insight, and do not acknowledge that there is a problem. Most patients are treated as out-patients, although hospitalization may be required in some cases if there is a risk of harm to self or others. Individual psychotherapy is recommended rather than group psychotherapy, as patients are often quite suspicious and sensitive. Antipsychotics are not well tested in delusional disorder, but they do not seem to work very well, and often have no effect on the core delusional belief. Antipsychotics may be more useful in managing agitation that can accompany delusional disorder. Until further evidence is found, it seems reasonable to offer treatments which have efficacy in other psychotic disorders.

Psychotherapy for patients with delusional disorder can include cognitive therapy which is conducted with the use of empathy. During the process, the therapist can ask hypothetical questions in a form of therapeutic Socratic questioning. This therapy has been mostly studied in patients with the persecutory type. The combination of pharmacotherapy with cognitive therapy integrates treating the possible underlying biological problems and decreasing the symptoms with psychotherapy as well. Psychotherapy has been said to be the most useful form of treatment because of the trust formed in a patient and therapist relationship.

Supportive therapy has also been shown to be helpful. Its goal is to facilitate treatment adherence and provide education about the illness and its treatment.

Furthermore, providing social skills training has helped many persons. It can promote interpersonal competence as well as confidence and comfort when interacting with those individuals perceived as a threat.

Insight-oriented therapy is rarely indicated or contraindicated; yet there are reports of successful treatment. Its goals are to develop therapeutic alliance, containment of projected feelings of hatred, impotence, and badness; measured interpretation as well as the development of a sense of creative doubt in the internal perception of the world. The latter requires empathy with the patient's defensive position.

Because of reduced levels of trust, there can be challenges in treating PPD. However, psychotherapy, antidepressants, antipsychotics and anti-anxiety medications can play a role when an individual is receptive to intervention.

Medications for schizophrenia are often used, especially when positive symptoms are present. Both first-generation antipsychotics and second-generation antipsychotics may be useful. Cognitive behavioral therapy has also been used.

In 2013, the American Psychiatric Association released the fifth edition of the DSM (DSM-5). To be diagnosed with schizophrenia, two diagnostic criteria have to be met over much of the time of a period of at least one month, with a significant impact on social or occupational functioning for at least six months. The person had to be suffering from delusions, hallucinations, or disorganized speech. A second symptom could be negative symptoms, or severely disorganized or catatonic behaviour. The definition of schizophrenia remained essentially the same as that specified by the 2000 version of DSM (DSM-IV-TR), but DSM-5 makes a number of changes.

- Subtype classifications – such as catatonic and paranoid schizophrenia – are removed. These were retained in previous revisions largely for reasons of tradition, but had subsequently proved to be of little worth.

- Catatonia is no longer so strongly associated with schizophrenia.

- In describing a person's schizophrenia, it is recommended that a better distinction be made between the current state of the condition and its historical progress, to achieve a clearer overall characterization.

- Special treatment of Schneider's first-rank symptoms is no longer recommended.

- Schizoaffective disorder is better defined to demarcate it more cleanly from schizophrenia.

- An assessment covering eight domains of psychopathology – such as whether hallucination or mania is experienced – is recommended to help clinical decision-making.

The ICD-10 criteria are typically used in European countries, while the DSM criteria are used in the United States and to varying degrees around the world, and are prevailing in research studies. The ICD-10 criteria put more emphasis on Schneiderian first-rank symptoms. In practice, agreement between the two systems is high. The current proposal for the ICD-11 criteria for schizophrenia recommends adding self-disorder as a symptom.

If signs of disturbance are present for more than a month but less than six months, the diagnosis of schizophreniform disorder is applied. Psychotic symptoms lasting less than a month may be diagnosed as brief psychotic disorder, and various conditions may be classed as psychotic disorder not otherwise specified, while schizoaffective disorder is diagnosed if symptoms of mood disorder are substantially present alongside psychotic symptoms. If the psychotic symptoms are the direct physiological result of a general medical condition or a substance, then the diagnosis is one of a psychosis secondary to that condition. Schizophrenia is not diagnosed if symptoms of pervasive developmental disorder are present unless prominent delusions or hallucinations are also present.

Schizophrenia is diagnosed based on criteria in either the American Psychiatric Association's (APA) fifth edition of the "Diagnostic and Statistical Manual of Mental Disorders" (DSM 5), or the World Health Organization's International Statistical Classification of Diseases and Related Health Problems (ICD-10). These criteria use the self-reported experiences of the person and reported abnormalities in behavior, followed by a clinical assessment by a mental health professional. Symptoms associated with schizophrenia occur along a continuum in the population and must reach a certain severity and level of impairment, before a diagnosis is made. As of 2013 there is no objective test.

The evidence for the effectiveness of early interventions to prevent psychosis appeared inconclusive. Whilst early intervention in those with a psychotic episode might improve short term outcomes, little benefit was seen from these measures after five years. However, there is evidence that cognitive behavioral therapy (CBT) may reduce the risk of becoming psychotic in those at high risk, and in 2014 the UK National Institute for Health and Care Excellence (NICE) recommended preventive CBT for people at risk of psychosis.

In patients suffering from schizophrenia, grandiose and religious delusions are found to be the least susceptible to cognitive behavioral interventions. Cognitive behavioral intervention is a form of psychological therapy, initially used for depression, but currently used for a variety of different mental disorders, in hope of providing relief from distress and disability. During therapy, grandiose delusions were linked to patients' underlying beliefs by using inference chaining. Some examples of interventions performed to improve the patient's state were focus on specific themes, clarification of neologisms, and thought linkage. During thought linkage, the patient is asked repeatedly by the therapist to explain his/her jumps in thought from one subject to a completely different one.

Patients suffering from mental disorders that experience grandiose delusions have been found to have a lower risk of having suicidal thoughts and attempts.

In the DSM-IV-TR, paranoia is diagnosed in the form of:

- paranoid personality disorder ()

- paranoid schizophrenia (a subtype of schizophrenia) ()

- the persecutory type of delusional disorder, which is also called "querulous paranoia" when the focus is to remedy some injustice by legal action. ()

According to clinical psychologist P. J. McKenna, "As a noun, paranoia denotes a disorder which has been argued in and out of existence, and whose clinical features, course, boundaries, and virtually every other aspect of which is controversial. Employed as an adjective, paranoid has become attached to a diverse set of presentations, from paranoid schizophrenia, through paranoid depression, to paranoid personality—not to mention a motley collection of paranoid 'psychoses', 'reactions', and 'states'—and this is to restrict discussion to functional disorders. Even when abbreviated down to the prefix para-, the term crops up causing trouble as the contentious but stubbornly persistent concept of paraphrenia".

At least 50% of the diagnosed cases of schizophrenia experience delusions of reference and delusions of persecution. Paranoia perceptions and behavior may be part of many mental illnesses, such as depression and dementia, but they are more prevalent in three mental disorders: paranoid schizophrenia, delusional disorder (persecutory type), and paranoid personality disorder.

Studies suggest that the prevalence of paraphrenia in the elderly population is around 2-4%.

While paraphrenia can occur in both men and women, it is more common in women, even after the difference has been adjusted for life expectancies. The ratio of women with paraphrenia to men with paraphrenia is anywhere from 3:1 to 45:2

A 2012 paper suggested that, when compared with experiences today, psychiatric conditions associated with psychotic spectrum symptoms may be possible explanations for some revelatory driven experiences and activities such as those of Abraham, Moses, Jesus, and Saint Paul. However, the paper admits that the study was not aimed to deny supernatural elements, nor was it conclusive on whether their experiences were delusional in part or not at all.

According to the DSM-5 (Diagnostic and Statistical Manual of Mental Disorders, 5th Edition), Cotard delusion falls under the category of somatic delusions, those that involve bodily functions or sensations. (Citation needed. DSM-5 does not specifically reference Cotard syndrome.)

There are no further diagnostic criteria for Cotard syndrome within the DSM-5, and identification of the syndrome relies heavily on clinical interpretation.

Cotard delusion should not be confused with Delusional Disorders as defined by the DSM-5, which involve a different spectrum of symptoms that are less severe and have lesser detrimental effect on functioning.

Examples from a 295-subject study in Lithuania showed that the most common religious delusions were being a saint (in women) and being God (in men).

In one study of 193 people who had previously been admitted to hospital and subsequently diagnosed with schizophrenia, 24% were found to have religious delusions.

A 1999 study identified that religious delusions were often present or expressed in persons with forensic committal to a psychiatric unit.

Research suggests that the severity of the delusions of grandeur is directly related to a higher self-esteem in individuals and inversely related to any individual’s severity of depression and negative self-evaluations. Lucas "et al." found that there is no significant gender difference in the establishment of grandiose delusion. However, there is a claim that ‘the particular component of Grandiose delusion’ may be variable across both genders. Also, it had been noted that the presence of GDs in people with at least grammar or high school education was greater than lesser educated persons. Similarly, the presence of grandiose delusions in individuals who are the eldest is greater than in individuals who are the youngest of their siblings.

The attribution model has been well talked about regarding paranoid or delusional individuals. The idea is that they like to assign issues to external events. A motivation behind this characteristic may involve the need for that person to develop a better self-image and maintain self-confidence. There have been debates about whether or not paranoid individuals are more likely to have a low or high self-perception, and results have been generated for both of these hypotheses. Researchers have made a distinction between positive self-esteem and negative self-esteem revealing that paranoid delusional individuals have more of a negative self-evaluation.

Because it is a rare and poorly understood condition, there is no definitive way to diagnose the Capgras delusion. Diagnosis is primarily made on psychological evaluation of the patient, who is most likely brought to a psychologist's attention by a family member or friend believed to be an imposter by the person under the delusion.

When the focus is to remedy some injustice by legal action, they are sometimes called "querulous paranoia".

In cases where reporters of stalking behavior have been judged to be making false reports, a majority of them were judged to be delusional.

PPD occurs in about 0.5%–2.5% of the general population. It is seen in 2%–10% of psychiatric outpatients. It is more common in males.

Current cognitive neuropsychology research points toward a two-factor approach to the cause of monothematic delusions. The first factor being the anomalous experience—often a neurological defect—which leads to the delusion, and the second factor being an impairment of the belief formation cognitive process.

As an example of one of these first factors, several studies point toward Capgras delusion being the result of a disorder of the affect component of face perception. As a result, while the person can recognize their spouse (or other close relation) they do not feel the typical emotional reaction, and thus the spouse does not seem like the person they once knew.

As studies have shown, these neurological defects are not enough on their own to cause delusional thinking. An additional second factor—a bias or impairment of the belief formation cognitive process—is required to solidify and maintain the delusion. Since we do not currently have a solid cognitive model of the belief formation process, this second factor is still somewhat of an unknown.

Some research has shown that delusional people are more prone to jumping to conclusions, and thus they would be more likely to take their anomalous experience as veridical and make snap judgments based on these experiences. Additionally, studies have shown that they are more prone to making errors due to matching bias—indicative of a tendency to try and confirm the rule. These two judgment biases help explain how delusion-prone people could grasp onto extreme delusions and be very resistant to change.

Researchers claim this is enough to explain the delusional thinking. However, other researchers still argue that these biases are not enough to explain why they remain completely impervious to evidence over time. They believe that there must be some additional unknown neurological defect in the patient's belief system (probably in the right hemisphere).

Routine medical assessments are often prescribed to rule-out or identify a somatic cause for bipolar I symptoms. These tests can include ultrasounds of the head, x-ray computed tomography (CAT scan), electroencephalogram, HIV test, full blood count, thyroid function test, liver function test, urea and creatinine levels and if patient is on lithium, lithium levels are taken. Drug screening includes recreational drugs, particularly synthetic cannabinoids, and exposure to toxins.

There is limited evidence that caffeine, in high doses or when chronically abused, may induce psychosis in normal individuals and worsen pre-existing psychosis in those diagnosed with schizophrenia.